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Investment Brief Vehizero S.A.

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Title: Investment Brief Vehizero S.A.


1
Investment BriefVehizero S.A.
  • Final Report
  • March 19, 2002
  • Prepared for Mr. Sean OHea
  • by the Fuqua Team

Fuqua Faculty Advisor Campbell Harvey Fuqua
Team Carlos Montalvan Jill Naughton Brian
OConnor Oleg Osipenko Jeremy Rogers
2
Outline of the Material
  • The project team undertook several material
    research activities to understand the
    attractiveness of Vehizero for potential
    investors
  • Overall Hybrid Vehicle Market does not look
    attractive, however the small delivery truck
    segment looks promising
  • Our valuation of Vehizero sets a range between
    3.3 million to 10.2 million, while the
    projects IRR is estimated to be 14
  • Based on the characteristics of the project,
    Vehizero is more likely to attract
    socially-oriented investors than strictly
    financial investors
  • Thus, we recommend that Vehizero launch an
    exploratory effort in the U.S. and other
    countries internationally, first targeting
    international development agencies and
    socially-oriented VC firms, then approach wealthy
    individuals as project reaches the next
    development stage

3
Outline of the Material
?
  • The project team undertook several material
    research activities to understand the
    attractiveness of Vehizero for potential
    investors
  • Overview of the work done
  • Overall Hybrid Vehicle Market does not look
    attractive, however the small delivery truck
    segment looks promising
  • Our valuation of Vehizero sets a range between
    3.3 million and 10.2 million, while the
    projects IRR is estimated to be 14
  • Based on the characteristics of the project,
    Vehizero is more likely to attract
    socially-oriented investors than strictly
    financial investors
  • Thus, we recommend that Vehizero launch an
    exploratory effort in the U.S. and other
    countries internationally, first targeting
    international development agencies and
    socially-oriented VC firms, then approach wealthy
    individuals as project reaches the next
    development stage

4
Overview of the Work Done
  • The project team undertook several material
    research activities to understand the
    attractiveness of Vehizero for potential
    investors
  • Researched web and literature to
  • Understand overall trends in global hybrid
    vehicle market
  • Understand Mexico automotive market
  • Evaluated project Vehizero company valuation
  • Identified key variables to be analyzed as key
    variables (Tornado Simulation)
  • Looked at different scenarios and their
    probabilities
  • Estimated the cash flows
  • Calculated the cost of capital
  • Evaluated the imbedded options of the project
  • Analyzed the attractiveness of different types of
    investors to Vehizero
  • Research of investment policies and objectives
  • Interviewed VC specialists and academics
  • Discussed the future of carbon trading with
    Chicago Exchange

5
Outline of the Material
  • The project team undertook several material
    research activities to understand the
    attractiveness of Vehizero for potential
    investors
  • Overall Hybrid Vehicle Market does not look
    attractive, however the small delivery truck
    segment looks promising
  • Overall Automotive trends point toward
    intensifying competition, however, the truck
    segment appears to be attractive
  • Moreover, the hybrid vehicle segment offers niche
    opportunity for small players like Vehizero
  • Although Mexican labor costs are rising sharply,
    the country will continue to have cost advantage
    in foreseeable future
  • Our valuation of Vehizero sets a range between
    3.3 million and 10.2 million, while the
    projects IRR is estimated to be 14
  • Based on the characteristics of the project,
    Vehizero is more likely to attract
    socially-oriented investors than strictly
    financial investors
  • Thus, we recommend that Vehizero launch an
    exploratory effort in the U.S. and other
    countries internationally, first targeting
    international development agencies and
    socially-oriented VC firms, then approach wealthy
    individuals as project reaches the next
    development stage

?
6
Overall automotive trends suggest intensifying
competition
MARKET OVERVIEW
  • Automotive Trends in Mexico and worldwide point
    toward increased competition
  • Increased competition. In 2004, local content
    rules within NAFTA will be eliminated. Experts
    believe competition will intensify as a result,
    and margins of domestic producers will decrease
  • Toyota enters the market. Toyota will start
    production of the light trucks in Mexico in year
    2004 with full production taking effect in 2006
  • Contraband. There are about 2 million illegal
    vehicles or auto chocolates of the total 14
    million cars in Mexico. Trucks assembled from the
    used parts cost legitimate truck producers 1/3 of
    their sales
  • Hybrids for Emerging Markets. Big Automakers
    start focusing on producing simplified models for
    emerging markets. In 2003, the world will see 9
    models specifically developed for emerging
    markets
  • Source Automotive News International /Mexican
    Truck Producer Association/Automotive News Europe

These trends indicate that taxi market will be
much more difficult to penetrate than delivery
truck market
7
However trucking industry appears to be
attractive segment
MARKET OVERVIEW
  • The Mexican truck fleet is large. Estimated to be
    450,000 units
  • Growing. At approximately 3 p.a.
  • Old. Average fleet age is 16.3 years
  • Not concentrated. There are some 5,000 trucking
    firms in Mexico city, plus large number of owners
    who own only a truck or two
  • And partially illegal. Approximately 20,000
    trucks enter Mexico illegally
  • Source U.S. Commercial Service. International
    Market Insight, 1999

Truck segment appears to offer some niche
opportunities to Vehizero
8
Hybrid vehicle offers opportunity
MARKET OVERVIEW
  • Several trends in the global hybrid vehicle
    market indicate that this segment will remain an
    attractive niche for small players like Vehizero
  • Different strategies. Different countries are
    pursuing different strategies in the search of a
    cleaner car. Japan is focusing on hybrid compact
    cars, Europe on fuel cell technology (i.e. pure
    electric vehicles), and US is focusing on hybrid
    trucks
  • Top priority in the US. President Bush recently
    requested that Congress approve tax breaks of up
    to 4,000 per hybrid car and up to 8,000 per
    fuel cell car
  • Its everybodys game. Large numbers of small
    firms are involved production around the world
  • Emerging markets have local players. India and
    Brazil are known to have domestic electric/hybrid
    vehicle manufacturers
  • Big guns move in. Every automaker is either
    already engaged in production of electric/hybrid
    vehicles or announced a program to introduce the
    first models in 2003-2004. As a result, the US
    hybrid market alone is estimated to reach 500,000
    in 5 years.
  • Hybrid cars are still expensive. Hybrid compact
    cars are sold by Honda and Toyota in the range of
    20,000 and hybrid trucks are priced at a 5,000
    premium to their gasoline equivalent

Hybrid vehicles segment offers opportunity for
small players but the window of opportunity is
closing rapidly.
9
Competition is coming from Big Automakers, but
not in trucks segment
  • Honda Insight The Insight is the first
    gasoline-electric hybrid vehicle to be sold in
    the United States. This two-seat coupe gets 70
    miles per gallon (mpg), and meets Californias
    stringent ultra low emission vehicle (ULEV)
    standards. It was endorsed by the Sierra Club and
    heralded in the ACEEE's Green Book. Priced under
    20,000, it is available through Honda dealers
    nationwide. The 2002 model is available with
    continuously variable transmission. www.honda.com

The Toyota Prius is a five-seat hybrid-electric
sedan that combines the range and performance of
a gasoline engine with the silence, efficiency,
and clean running of an electric motor. The
vehicle never requires external source
recharging. It meets California's Super-Ultra-Low
Emission Vehicle (SULEV standards. It is sold
nation-wide through Toyota dealers for 20,000.
www.prius.toyota.com
Even though every global automotive player has at
least one cleaner model, no company has yet
developed a light truck model
10
And Hybrid Vehicle Market Newcomers
MARKET OVERVIEW
  • Electric Postal Vehicle by Baker Electromotive,
    Inc and Ford are producing 5,000 electric postal
    service vehicles for the US Postal Service. The
    vehicles are battery powered and can be driven
    between 50 and 80 miles before recharging. They
    accelerate from 0 to 50 mph in 12.5 seconds and
    produce virtually no tailpipe emissions. Email
    Baker Electromotive, Inc, sales_at_vaenergy.com.

The Solectria CitiVan a walk-in delivery van,
comes in an all-electric or a hybrid-electric
model. Rugged construction assures long vehicle
life and low maintenance costs. Powered by the
same state-of-the-art Solectria technology found
in over 1000 EVs on the road worldwide, the
Solectria CitiVan is in service in Massachusetts,
California, New York, Canada, and Chile.
www.solectria.com
The delivery truck niche is being quickly filled
up by relatively unknown newcomers
11
Heavy/Medium Truck Companies in Mexico
MARKET OVERVIEW
  • Navistar International, world leader in the
    manufacture of trucks and buses, is on the
    vanguard of corporate environmental reformThe
    company has its own Escobedo Plant in Nuevo
    Leon... Company has more than 1,100 dealers
    worldwide, and 9 parts distribution centers
  • Source Business Mexico, December 1999

The company is also working with Lockheed Martin
to produce Hybrid Electric Vehicles (HEV), which
run from a combination of traditional diesel
engines and electric battery power. The two are
currently test driving a HEV medium truck and are
developing HEV school buses and delivery trucks.
www.navistar.com Sources American Chamber of
Commerce of Mexico, A.C. , 1999
Small delivery truck niche could potentially be
attacked by the large/medium truck manufacturers
12
Still Mexican companies will retain labor cost
advantage over US rivals
MARKET OVERVIEW
  • The 19-day strike earned VW employees a 14.7
    increase in wages, from 25.50/day to 28.50/day
    plus food coupons
  • Yet the cost of one union worker in US is 120
    to 190 per day

Source Guillermo Valdes, Economists Associates
Group, Mexico City
13
despite quickly rising labor costs
MARKET OVERVIEW
Labor costs are rising sharply but still much
lower than US level
  • Real wages in the Mexican automotive industry
    will increase 33 while productivity will
    increase by 9 for the period of 2000-2004.
  • Armando Soto, Ciemex-Wefa economic consultancy
  • "It's no longer an easy answer to produce cars in
    Mexico labor costs in the industry have risen
    50 in dollar terms since the end of 1998
  • Economist Rogelio Ramirez de la O
  • Output per head is about a quarter of what is
    achieved in the United States given cooked and
    tested technology and fairly simple production
    lines, Mexico can match U.S. productivity rates
    for some vehicles,"
  • Sean McAlinden, analyst, University of Michigan
  • Labor Unions are quite strong. Recent strike at
    Volkswagen plant in Pueblo, ended with 14.7
    wages increase

14
Outline of the Material
  • The project team undertook several material
    research activities to understand the
    attractiveness of Vehizero for potential
    investors
  • Overall Hybrid Vehicle Market does not look
    attractive, however the small delivery truck
    segment looks promising
  • Our valuation of Vehizero sets a range between
    3.3 million and 10.2 million, while the
    projects IRR is estimated to be 14
  • Valuation
  • Risk assessment
  • Imbedded options
  • Based on the characteristics of the project,
    Vehizero is more likely to attract
    socially-oriented investors than strictly
    financial investors
  • Thus, we recommend that Vehizero launch an
    exploratory effort in the U.S. and other
    countries internationally, first targeting
    international development agencies and
    socially-oriented VC firms, then approach wealthy
    individuals as project reaches the next
    development stage

?
15
Funding Requirements appear to be higher than
initially estimated
VALUATION
  • Funding requirements range from 4.1M to 6.9M
  • Recommended funding 5.5M
  • capital outlay of 3.4M
  • 300K for prototypes
  • 3.1M to build plant and WC
  • 2.1M to sustain losses for 3 years
  • expected accumulative accounting losses for three
    years is 2.1M

16
Approach to valuation
VALUATION
  • Key variables
  • Tornado? chart identifies key variables to
    analyze and monitor
  • Probabilities and ranges
  • Crystal Ball simulation
  • Trucks Only
  • Price, COGS, sales in full production
  • Taxi Cab option
  • Market size, price of taxis (assumed margin), 1st
    year penetration, growth during following years,
    cost of expansion

17
Key Variables used in the valuation
VALUATION
  • Tornado? chart to identify impact of variables

9,500
18
Simulated Key variables
VALUATION
HYBRID TRUCKS DATA Price Post Plant Truck
COGS Terminal Quarterly Sales Rate TAXI OPTION
DATA Price Penetration (i.e. Market Share) 1st
Year of Taxi Sales Penetration Growth Rate (from
1st Year Market Share) Quarterly Market Size for
Taxis 1st Year of Taxi Sales Plant Expansion
Costs
19
Cost of Capital
VALUATION
  • Cost of Capital 17.9
  • ICCRC (International Cost of Capital Risk
    Calculator) 18.9
  • Based on a risk free rate of 5
  • Risk premium of 5
  • Anchored to the US
  • Adjustments -1
  • Vehizero has mitigated some risks because you are
    aligned with government and environmental
    initiatives
  • Company exposed to most standard risks in Mexico
  • ICCRC calculates the cost of capital for 135
    international capital markets. It provides an
    alternative calculation to the CAPM and other
    traditional approaches that are less accurate for
    emerging markets. The ICCRC return reflects
    countries risk premiums based on a comprehensive
    methodology with strong economic foundations.
    The ICCRC accounts for risks such as a countrys
    economic and political stability. It is also
    anchored to the U.S. rate, so that the country
    rates are calibrated from that of the US. The
    intent is to adjust the denominator for
    countrywide affects.

20
Internal Rate of Return of the Project is around
14
VALUATION
  • We have performed 25 runs of the model to
    determine the IRR for both taxi and truck
    markets. The results are summarized below

21
NPV of the trucks only ranges from 3.3 million
to 9.6 million
VALUATION
Mean 1.02 M Entire Range -3.3 M to 9.6 M
22
NPV of the project ranges from 3.3 million to
10.2 million
VALUATION
Mean 1.30 M Entire Range -3.3 M to 10.2 M
23
Cost of Capital
VALUATION
  • Review financial model

24
Taxi option increases the upside but does not
mitigate the downside
Taxi option is attractive only if truck market is
a success. Thus, taxi option does nothing to
mitigate the downside risk for the investor
25
Each variable is affected by variety of economic
factors
RISK ASSESSMENT
  • Price fluctuations
  • Competition
  • Increased cost of labor
  • Ability to shift all supply purchases to Mexico
  • Economic crisis / recession / inflation
  • Sales
  • On time production development
  • Ability to produce and sell at full capacity
  • Dependence on price fluctuations
  • Competition
  • Taxi option
  • Execute option to expand into taxi market
  • Ability to penetrate market

26
Sovereign risk is low
RISK ASSESSMENT


27
Pre-completion risk is low with certain ability
to mitigate it further
RISK ASSESSMENT
28
Operation risk is moderate with little ability
for Vehizero to mitigate
RISK ASSESSMENT
29
High financial risk with no clear opportunity to
mitigate
RISK ASSESSMENT
30
Carbon trading option is not viable
IMBEDDED OPTIONS
  • The possibility to trade carbon emissions quotas
    is extremely unlikely
  • Although Mexico ratified the Kyoto Protocol no
    clear carbon bond valuation has been established
  • Although alternatives to the Kyoto Protocol are
    being discussed in various sectors of the world
    community, they face the same challenges as Kyoto
    Protocol.
  • Given Vehizeros size, value of the carbon bond
    would be minimal
  • CREATION OF THE CARBON BONDS TRADING MARKET IN
    THE IMMEDIATE FUTURE IS UNLIKELY
  • Source in the Chicago Carbon Emissions Exchange

The creation of the carbon emission market seems
will not be viable for the next few years
31
Latin America expansion option is difficult
IMBEDDED OPTIONS
  • Other Latin American Cities are much less
    polluted than Mexico City
  • Of all Latin American Cities, only Mexico City
    made it top 10 most polluted world cities
  • Mexico City pollution level is 2 times higher
    than any other Latin American City
  • Some Latin American Countries already have local
    competition
  • Solectria already operates in Chile
  • Brazil has its own electric vehicle manufacturer
    that specializes in buses
  • Public transportation systems in Latin America
    are at different stages of development
  • Different per capita incomes as well as different
    gasoline vehicle prices will influence the
    possibility of expanding into other Latin
    American Cities

The possibility of success of Latin American
expansion option seems less likely than
possibility of success in the Mexico City, as
some cities in Latin America have already
established players.
32
Mexico City remains among the worlds dirtiest
cities
IMBEDDED OPTIONS
Source World Bank, World Development Indicators,
1998 Air pollution
Mexico City has a highest air pollution level
among Latin American Cities. As a result, the
government effort to clean the environment is one
of the strongest in Latin America
33
Outline of the Material
  • The project team undertook several material
    research activities to understand the
    attractiveness of Vehizero for potential
    investors
  • Overall Hybrid Vehicle Market does not look
    attractive, however the small delivery truck
    segment looks promising
  • Our valuation of Vehizero sets a range between
    3.3 million and 10.2 million, while the
    projects IRR is estimated to be 14
  • Based on the characteristics of the project,
    Vehizero is more likely to attract
    socially-oriented investors than strictly
    financial investors
  • Identified 5 groups of potential investor
  • Developed a rating system to evaluate the capital
    opportunities
  • Evaluated the probability of securing funds from
    each group
  • Thus, we recommend that Vehizero launch an
    exploratory effort in the U.S. and
    internationally, first targeting international
    development agencies and socially-oriented VC
    firms, then approach wealthy individuals as
    project reaches the next development stage

?
34
Identified 5 groups of potential investors
POTENTIAL INVESTORS
  • Development Agencies
  • International organizations such as World Bank,
    International Finance Corporation, USAID, and
    others
  • Social Venture Capital
  • Private Capital pursuing dual objectives of
    financial return and social benefit
  • Publicly traded mutual funds that invest in
    socially responsible enterprises
  • Wealth Individuals
  • Wealthy Individuals that donate money to various
    social causes
  • Bank debt
  • Traditional bank loans
  • Traditional Venture Capital
  • Private capital seeking financial returns

35
Developed Rating System to Evaluate Capital
Opportunities
POTENTIAL INVESTORS
Attractiveness to Vehizero
Ability to secure funds
CRITERIA RATED AS LOW, FAIR, GOOD OR HIGH
  • Does the current Vehizero management retain
    control over strategic decisions?
  • Is there financial flexibility regarding the
    timing of the payout to investors?
  • Will investor stick with Vehizero in the long-term
  • Does Vehizero offer attractive returns to this
    particular type of investor?
  • Are the risks inherent to Vehizero project
    acceptable to investor?
  • Is there strategic fit between Vehizero project
    and investors objectives?

36
Developed Matrix to Compare Sources of Financing
POTENTIAL INVESTORS
Ability to secure Funds
Excellent Sources
High
  • Attractive return
  • Low risk
  • Strategic fit

Attractiveness to Vehizero
Good
Ability to obtain funds
Fair
  • Strategic Control
  • Financial Flexibility
  • Risk of abandonment

Unattractive Sources
Low
High
Low
Fair
Good
Attractiveness To Vehizero
The matrix evaluates the attractiveness of the
different sources of financing from the
prospective of the potential investor and
Vehizero using the criteria above
37
Development Agencies are a likely group to
provide capital to Vehizero
POTENTIAL INVESTORS
  • Accept lower returns. Development Agencies accept
    lower returns than strictly financial lenders
  • Tolerate higher financial risk but very cautious
    towards social risks. Although Development
    Agencies may tolerate high financial risks, they
    are quite cautious of the risk of negative
    publicity, such as misused funds, negative social
    or environmental impact. To secure funds,
    Vehizero must demonstrate the positive
    environmental effect of the project
  • Strategic fit. Development Agencies have very
    good strategic fit with Vehizero, as both
    entities are trying to improve the environment
  • Strategic control. Although Development Agencies
    strictly monitor the use of their funds, they
    usually do not interfere into daily operations of
    the enterprise
  • Financial Flexibility. Most financing from
    Development Agencies comes in the form of debt,
    which limits the financial flexibility for
    Vehizero
  • Risk of abandonment. Development Agencies are
    usually more tolerant towards downside in
    operational performance and rarely abandon their
    projects

38
Development Agencies are a very likely group to
provide capital to Vehizero
POTENTIAL INVESTORS
  • WORLD BANK International Finance
    Corporation
  • Mexico accounts for the second largest in the
    Bank's disbursed and outstanding portfolio,
    totaling US 11.1 billion or 9.4 percent of the
    Bank's total portfolio
  • Banks Strategy in Mexico involves expansion of
    the Air Quality Program to a second phase in
    Mexico City
  • Currently, the World Bank studies the granting of
    a US 11.8 million loan for
    the Santiago (Chile) plan, whose main objective
    is to reduce the emissions of polluting gases in
    the city. Some money will go the the local
    producer of the electric buses.
  • Our initial contact with the Banks private
    investment arm International Finance
    Corporation indicated the possibility of funding

39
A related business in Mexico City has already
secured funding from IFC
POTENTIAL INVESTORS
  • INTERNATIONAL FINANCE CORPORATION
  • In year 2001, IFC approved 10 million
    investment to Combustibles Ecologicos Mexicanos
    (Ecomex), the only supplier of the compressed
    natural gas for vehicles in Mexico City.
  • The investment is split between 1.5 million
    quasi-equity and 8.5 million debt
  • Ecomex has proved to IFC the strong positive
    environmental effect of the venture.

40
Vehizero may qualify for funding from IFC
POTENTIAL INVESTORS
  • INTERNATIONAL FINANCE CORPORATION
  • IFC funds different type of projects based on
    their expected financial performance and the
    economic sector in which they are developed.
  • IFC invests in either equity or debt.
  • The minimum amount of investment is US10M, which
    cant exceed 25 of the equity of the company.
    Also, the investment cant exceed 50 of the
    project value.
  • However, exceptions can be made on a case-by-case
    basis.

Source Country Officer IFC Mexico
41
We recommend Vehizero to contact the IFC
representative in Mexico
POTENTIAL INVESTORS
  • INTERNATIONAL FINANCE CORPORATION
  • Mr. Manuel Núñez,
  • Resident Manager
  • Email Mnunez_at_ifc.org
  • Prado Sur 240, Suite 402
  • Lomas de Chapultepec
  • Delegación Miguel Hidalgo
  • Mexico D.F. 11000, Mexico
  • Phone (52-5) 520-6191
  • Fax (52-5) 520-5659

Ing. Gabriel España Carbajal Investment
Officer/Country Officer gespana_at_ifc.org
42
Other Development and Government Agencies
POTENTIAL INVESTORS
  • Development Agencies
  • USAID
  • Provides Grants and Other Financial Aid to
    Promote the Environment
  • U.S. Agency for International Development
    Information Center
  • Ronald Reagan Building
  • Washington, D.C. 20523-1000
  • Telephone 202-712-4810
  • FAX 202-216-3524
  • US Environmental Protection Agency (EPA)
  • Works with Private Sector to promote the use of
    energy-efficient equipment
  • U.S. Environmental Protection Agency
  • Office of the Comptroller
  • Environmental Finance Program (Mail Code) 2731R
  • Ariel Rios Building 1200 Pennsylvania Ave., NW
  • Washington, D.C 20460
  • Government Agencies
  • México Citys Department of the Environment

43
Development Agency, and IFC specifically, are
attractive option for Vehizero
POTENTIAL INVESTORS
Good strategic fit indicates the opportunity for
Vehizero to attract funds from Development
Agencies. However, the small size of the project
might be an issue to overcome
44
Securing Bank debt is highly unlikely
POTENTIAL INVESTORS
  • Project returns are acceptable. Vehizeros
    projected return of 14 will probably be
    sufficient to guarantee the repayment of the
    banks loan.
  • However, the risk is totally unacceptable. There
    are 2 issues that make risk of Vehizero project
    to high for the traditional lending institution
  • Collateral. Lack of tangible, marketable assets
    that could be pledged as a collateral increases
    the risk of negative returns.
  • Credit History. Vehizero has not built up a
    credit history, as a result is considered a
    highly risky investment
  • Poor Strategic fit. Commercial Banks rarely
    invest in the start-up entities, such as
    Vehizero.
  • Strategic control. Banks rarely interfere in a
    day-to-day operations of the borrower.
  • Financial Flexibility. Strict interest payment,
    principle repayment schedule, and debt covenants
    make the bank debt the least flexible category of
    capital.
  • Risk of abandonment. High risk of abandonment as
    bank can pull out the capital at the first minor
    violation.

45
Securing bank loan seems unlikely
POTENTIAL INVESTORS
Lack of collateral and credit history, as well as
early stage of the development of Vehizero makes
obtaining bank loan unlikely
46
Traditional Venture Capital Firms are not a good
option to pursue
POTENTIAL INVESTORS
  • Vehizero returns are inadequate. Even in the
    United States VC do not invest in projects that
    offer less than 25 returns
  • Tolerate risk. VC accept the fact that 7-8 of the
    ventures will eventually fail.
  • Strategic fit. Good strategic fit due to the
    interesting product concept, however, traditional
    VC do not value the social/environmental impact.
    In addition, this group will be most concerned
    with Vehizero exit strategy, which at this point
    is not clear.
  • Strategic control. Depends on the style, could be
    very hands-on
  • Financial Flexibility. Relatively flexible
  • Risk of abandonment. Venture Capital firms will
    sell the investment at first available
    opportunity

47
Venture Capital in Mexico
POTENTIAL INVESTORS
  • Total investment by international private equity
    funds in Mexico is 250 million
  • Private equity investors in Latin America will
    increase Mexico weight from 27 to 37 of the
    total Latin America portfolio
  • The hurdle rate on the Venture Capital investment
    is 30-40
  • Investments are made in variety of different
    sectors

Mexican Private Equity Investment by Sector
Source Venture Capital Journal March 1, 2001
48
The supply of foreign venture capital is almost
exclusively foreign
  • As the local institutional investor base is
    still underdeveloped, the supply of venture
    capital is almost exclusively foreign

Venture Capital Firms in Mexico of total VC market
Hicks, Muse, Tate Furst 18
J.P. Morgan Capital 14
CVC Latin America 10
Blackstone Group 10
Newbridge Latin America 7
Advent International 6
Barings Venture Capital lt6
Others 30
Total 100
Source Venture Capital Journal March 1, 2001
The Economist Intelligence Unit, Country Finance
Report, April 2001
In most cases, Vehizero size will too small for
large international players
49
Securing capital from traditional VC firms seems
unlikely
POTENTIAL INVESTORS
Lack of strategic industry fit, small size, and
low return make Vehizero extremely unattractive
to traditional Venture Capital Firms
50
Social Investment Funds offer the opportunity of
raising some capital
POTENTIAL INVESTORS
  • Accept lower returns. Social Investment Funds
    accept lower returns than strictly financial
    lenders
  • Tolerate higher financial risk but very cautious
    towards social risks. Just like Development
    Agencies, Social Investment Funds may tolerate
    high financial risks, they are quite cautious of
    the risk of negative publicity, such as misused
    funds, negative social or environmental impact.
    To secure funds, Vehizero must demonstrate the
    positive environmental effect of the project
  • Strategic fit. Social Investment Fund have very
    good strategic fit with Vehizero, although they
    prefer to fund expansion phase, not seed/start-up
    phase.
  • Strategic control. Usually exercise laissez-faire
    approach to investment
  • Financial Flexibility. Very flexible
  • Risk of abandonment. Rarely abandon their
    projects, however, the financial viability of the
    funds themselves is sometimes a question.

51
Social Funds Universe
POTENTIAL INVESTORS
  • Socially oriented VC firms
  • Calvert Social Venture Partners
  • Publicly traded mutual funds that invest in
    socially-oriented enterprises
  • UBS Warburg (Lux) Equity Fund Eco Performance
  • The Calvert Social Investment Fund
  • Green Century
  • Pax World
  • Funds in Latin America
  • NAEF (Ventana)
  • Corporación Financiera Ambiental, S.A.-CFA
  • ECo.
  • EcoEnterprises Fund

52
Publicly traded mutual funds
POTENTIAL INVESTORS
  • UBS Warburg (Lux) Equity Fund Eco Performance
  • Eco Performance is an environmental fund which
    fulfils the requirements of a broadly diversified
    global investment fund. It also represents an
    alternative to global investment funds, bringing
    an additional ecological benefit.
  • http//www.ubs.com/e/investmentfunds/ecoperformanc
    e.html
  • Tel 41-1-235 36 36
  • Fax 41-1-234 93 20
  • The Calvert Social Investment Fund
  • Calvert has been in the mutual fund business for
    25 years and manages approximately 7.8 billion
    in assets in 27 screened and non-screened
    portfolios for over 220,000 shareholders.
  • http//www.calvertgroup.com/sri_654.html
  • David Mallery or Stephen Moody
  • Venture Principals
  • E-mail ventures_at_calvert.com
  • Telephone 301/961-4786

53
Calvert Social Investing
POTENTIAL INVESTORS
  • Portfolio at a Glance (9/30/01)
  • Active Investments 30 unique, direct
    investments, one of which is common to both
    funds 25 unique, intermediated investments in
    other private equity funds and financial
    institutions, two of which are common to both
    funds
  • Areas of Investment environment, education,
    health, energy, minority enterprise,
    community/economic development
  • Investment Size 100,000 - 750,000 (direct
    investments), 100,000 - 1,000,000 (other funds)
  • Types of Investment equity, convertible debt,
    limited partnership interests
  • Preferred Investment Role prefer participation
    with other institutions generally not a lead
    investor
  • Stage of Investment early-to-expansion stage
    generally not a seed or start-up investor

54
Publicly traded mutual funds
POTENTIAL INVESTORS
  • Green Century
  • The Green Century Equity Fund's objective is to
    achieve long-term total return which matches the
    performance of an index composed of the stocks of
    400 companies selected based on social and
    environmental criteria.
  • http//www.greencentury.com/GCEF.htm
  • 29 Temple Place
  • Boston, Massachusetts 02111
  • 1-800-93-GREEN
  • info_at_greencentury.com
  • Pax World
  • Another socially responsible fund
  • http//www.paxfund.com/index.htm
  • Pax World Funds
  • 222 State Street
  • Portsmouth, NH 03801
  • 1-800-767-1729

55
Latin American Funds
POTENTIAL INVESTORS
  • ECo
  • ECo was established in 1994 as an independent
    non-profit organization with the strategy of
    providing enterprise development services and
    modest amounts of money (50,000 or less to
    250,000)in the form of loans and equity
    investmentsto
    economically, socially and
    environmentally sustainable energy
    enterprises in
    developing countries.
  • http//www.energyhouse.com/
  • http//www.iadb.org/mif/investment_page/english/ea
    ndco.html
  • 383 Franklin Street
  • Bloomfield, New Jersey
  • 07003 USA
  • Ph (973) 680 9100
  • Fax (973) 680 8066
  • E-mail eco_at_energyhouse.com

56
Latin American Funds
POTENTIAL INVESTORS
  • The EcoEnterprises Fund
  • The 10 million EcoEnterprises Fund offers
    venture capital to environmentally and socially
    responsible businesses in Latin America and the
    Caribbean. The Fund invests in ventures at all
    stages of development with sales revenues up to
    3 million. Investment size ranges from 50,000
    to 800,000, with an average investment of
    225,000. The Fund will finance up to 50 percent
    of project costs, using a variety of equity or
    debt instruments. The Fund is able to provide
    flexible financing to promote long-term success.
  • http//www.iadb.org/mif/investment_page/english/ea
    ndco.html
  • The Nature Conservancy 4245
  • North Fairfax Drive, Arlington, VA 22203
  • Tel 703-841-8176
  • Fax 703-841-4880 Fax 506-220-2551
  • Email ecoenterprisesfund.com

57
Latin American Funds
POTENTIAL INVESTORS
  • Corporación Financiera Ambiental, S.A.-CFA
  • Corporación Financiera Ambiental provides
    long-term investment capital for businesses with
    solid growth potential. These enterprises involve
    the sustainable or environmentally friendly use
    of natural resources. CFA is managed by Empresas
    Ambientales de CentroAmerica and its parent
    company, Environmental Enterprises Assistance
    Fund. Company invests in the Energy Efficiency
    Sector
  • http//www.eeaf.org
  • http//www.iadb.org/mif/investment_page/english/cf
    a-engl.html
  • Environmental Enterprises Assistance Fund
  • 1901 North Moore Street, Suite 1004
  • Arlington, VA 22209, EE.UU.
  • Tel (703) 522-5928
  • Fax (703) 522-6450
  • Web http//www.eeaf.org
  • E-mail jdd_at_eeaf.org

58
Another Social Fund to contact may be the NAEF
POTENTIAL INVESTORS
  • NAEF North America Environmental Fund
  • NAEF is a US36M private fund that promotes the
    environmentally friendly industries in US, Canada
    and Mexico.
  • NAEF was created by Nacional Financiera Mexican
    bank, OECF Japanese entity, and Ventana private
    firm.
  • NAEF mainly invests in projects that reduce air
    pollution, recycling, energy production.

Source Multilateral Investment Fund /
www.iadb.org/mif/
59
We suggest Vehizero to contact the NAEF (VENTANA)
representative
POTENTIAL INVESTORS
  • NAEF North America Environmental Fund
  • Carlos de Rivas Oest
  • Phone (5) 258-0175
  • Fax (5) 258-0186
  • E-mail cderivas_at_ventanaglobal.com

60
Securing capital from Social Funds firms is a
good opportunity
POTENTIAL INVESTORS
Great strategic fit, financial and strategic
flexibility point toward Social Funds as a viable
option to obtain funds
61
Obtaining capital from wealthy individuals might
be possible
POTENTIAL INVESTORS
  • Project returns might be almost irrelevant.
    Wealthy individuals might view the project as
    financial aid not as a profit-seeking enterprise
  • Social risks are important. Wealthy individuals
    are the most cautious category when it comes to
    the risks of bad publicity
  • Strategic fit. Depends on the individual and his
    charitable goals. The small size and far-away
    location might be a concern. This category could
    be hit or miss.
  • Strategic control. These individuals will not
    engage into the operations of such a small
    enterprise.
  • Financial Flexibility. Capital is likely to be
    viewed as a donation, however, this donation is
    unlikely to be sufficient.
  • Risk of abandonment. Individuals are likely to
    give one-off donation, and are unlikely to engage
    in several rounds of financing.

62
Wealthy Individuals are known to donate money to
environmental causes
POTENTIAL INVESTORS
  • CURRENT DONORS
  • Ted Turner
  • Granted 1 billion to United Nations for various
    social and environmental causes
  • Potential Donors
  • David Rockefeller
  • Carlos Slim
  • George Soros

63
Securing capital from might be a distant third
option for Vehizero
POTENTIAL INVESTORS
Low demands for financial return and
laissez-faire attitude make wealthy individuals
marginally attractive
64
Any investor is likely to inquire Vehizero about
the following
  • Exit strategy
  • With IPO not being a viable selling to strategic
    investor (I.e. large automaker) remains the only
    option
  • Selling expertise
  • Vehizero currently lacks selling expertise, as
    its human talent is concentrated in the
    engineering aspect. As the company moves forward
    from being RD stage to commercial enterprise
    stage, how does Vehizero plan to overcome this
    lack of expertise?
  • Servicing expertise
  • Vehizero currently does not highlight the area of
    servicing and repairing its vehicles. Future
    investors would need to be convinced that this is
    not a risk area
  • Environmental impact
  • Battery recyclable?
  • Ratio of vehicle gasoline consumption vs. power
    plant gasoline consumption to produce
    electricity?
  • Parts recyclable?

65
Outline of the Material
  • The project team undertook several material
    research activities to understand the
    attractiveness of Vehizero for potential
    investors
  • Overall Hybrid Vehicle Market does not look
    attractive, however the small delivery truck
    segment looks promising
  • Our valuation of Vehizero sets a range between
    3.3 million and 10.2 million, while projects
    IRR estimated to be 14
  • Based on the characteristics of the project,
    Vehizero is more likely to attract
    socially-oriented investors than strictly
    financial investors
  • Thus, we recommend that Vehizero launch an
    exploratory effort in the U.S. and other
    countries internationally, first targeting
    international development agencies and
    socially-oriented VC firms, then approach wealthy
    individuals as project reaches the next
    development stage

?
66
Summary of the investor evaluation
RECOMMENDATION
Social Funds and Development Agencies are the
most likely sources of financing
67
Results of the investor analysis
RECOMMENDATION
Ability to secure Funds
Excellent Sources
High
  • Attractive return
  • Low risk
  • Strategic fit

Social Funds
Attractiveness to Vehizero
Development Agencies
Good
Ability to obtain funds
Fair
  • Strategic Control
  • Financial Flexibility
  • Risk of abandonment

Wealthy Individuals
Unattractive Sources
Traditional VC
Low
Bank Debt
High
Low
Fair
Good
Attractiveness To Vehizero
Social Funds and Development Agencies are the
most likely sources of financing, with wealthy
individuals being a distant third option
68
Final conclusions and recommendations
RECOMMENDATION
  • CONCLUSIONS
  • Funding requirements to sustain operations for up
    to 3 years are estimated to be 5.5M. This
    includes capital expenditures and accounting
    losses
  • Vehizero valuation ranges from 3.3 million to
    10.2 million with average IRR estimated to be
    14. There is a great deal of volatility within
    the range, and the mean valuation is around 1
    million.
  • While entering the delivery vehicle segment is
    possible, the options of entering the taxi
    segment, expansion to other cities in Latin
    America, and trading carbon bonds are much less
    viable.
  • RECOMMENDATIONS
  • Vehizero should launch an exploratory effort in
    the U.S. and other countries internationally,
    first targeting international development
    agencies and socially-oriented VC firms, then
    approach wealthy individuals as project reaches
    the next development stage
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